eco 202 ch 36 unemployment and inflation
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Chapter 36 !
Unemployment and Inflation
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Economic Cycle
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Saudi Inflation Rate
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A. W. Phillips (1914 - 1975)
Phillips Curve
Relationship between
Inflation and Unemployment
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Phillips Curve
A curve that shows the short-run trade-off
between unemployment and inflation
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George Akerlof (1940 - )
Nobel Prize 2001
"Probably the single most important
macroeconomic relationship is
the Phillips curve."
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Inflation Rate
Unemployment Rate
Phillips Curve
19611963
1962
1964
1965
19661967
1968
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Inflation Rate
Unemployment Rate4% 7%
6%
2%
Phillips Curve
Tradeoff High Inflation and Low Unemployment Low Inflation and High Unemployment
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Milton Friedman (1912 - 2006)
Is there a long term
relationship between
Inflation and Unemployment?
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Inflation Rate
Unemployment Rate
19611963
1962
1964
1965
19661967
1968
1969 19701971
1972
1973
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Inflation Rate
Unemployment Rate
1968
1969 19701971
1972
1973
No Relationship
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Milton Friedman (1912 - 2006)
No Long Run Structural
Relationship between
Inflation and Unemployment
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Short-Run !
!
Long-Run
Inflation can reduce unemployment
!
Inflation and unemployment are unrelated
!
!
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Inflation Rate
Unemployment Rate
Phillips -Friedman Curves
Short-Run
Long-Run
No relationship because LRAS is vertical
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Price Level
Quantity of Output
P1
AD- AS Model
Aggregate Demand
Short Run Aggregate Supply
Y1 Y2
P2
Long Run Aggregate Supply
P3
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Natural Rate Hypothesis
The claim that unemployment returns to its normal, or natural rate regardless of the rate of
inflation
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Disinflationreduction in the rate of inflation - slows down
Deflationreduction in the price level
go in reverse
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Saudi Inflation Rate
Deflation
Disinflation
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1. What is the Phillips Curve? !
2. What is the Friedman Curve? !
3. Can inflation be good? !
4. What is worse, inflation or deflation? !
5. What is disinflation?